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Nykaa: Beauty-ful E-commerce play

Company Name – FSN E-Commerce Ventures Ltd (Nykaa)

Current Share Price – INR 1,411 (August 5, 2022)

Market Cap – INR 66,931 cr


1. What is interesting about the stock?

Makeup is not a mask that covers up your beauty; it’s a weapon that helps you express who you are from the inside”. — Michelle Phan

How much time does your wife or female partner take to get ready? Always, beating the expectations!

Looking good is a basic need of any human being – it is a bit more pronounced in the fairer sex for a lot of cultural or psychological reasons. Beauty, personal care, and fashion products are an age-old industry that would also be evergreen. We may shift from offline to online or from chemical-based to natural/vegan, but the need would always be there.

Fashion is easy to understand. Face, body, eye, lip, and nail products are covered in beauty and personal care products.

Based on my personal experience, the amount of beauty, personal care, and fashion products purchased (per capita) in India is significantly less than in the Middle East or South East Asia. Even Europe and US are ahead of India. The current size of the beauty & personal care (BPC) market in India is estimated to be around USD 16 billion in 2020. The expected growth rate could be around 12% up to 2025 driven by under-usage (vs global standards) and an increase in disposable income. Online penetration in the BPC industry is around 8% (source – Company RHP). China, the US, and Korea have online penetration of 35%, 20%, and 45% respectively. A lot of room for online BPC industry growth.

Enter Nykaa!!

Nykaa is a consumer technology platform selling beauty, personal care, and fashion products. The company was launched in 2012 to focus on the BPC segment and is an omnichannel player with around 112 physical stores across 52 cities. Beauty products have a very high margin, making them vulnerable to fake products. So, Nykaa follows the inventory model to solve the authenticity issue in the BPC products. BPC contributes around 90% of the Company's revenue. The company launched the fashion segment around three years back.

Why invest in Nykaa?

The key investment arguments would be:

  • Market leader, with a market share of almost 40%, in the online BPC market (expected to grow fast)

  • A content-led business model with a focus on curation – 5,400 influencers, ~23 million post views in FY22 - this drives stickiness and is a big MOAT

  • Extensive (and sometimes exclusive) brand relationships

  • Excellent management team

  • Profitable start-up (especially at EBITDA level) generating positive cash flow

How do operating metrics look?

As I had mentioned in the Zomato article, we need to understand and focus on operating metrics when investing in a young start-up. The company generates 90% of revenue from the BPC segment so I would focus on its operating metrics:

Key takeaways:

  • Unique transacting customers have grown from 3.5 million in FY19 to 8.4 million in FY22 – a 2.4x increase

  • The average order per customer is 3.1-3.3x from FY19-22

  • Average order value (AOV) had sharply increased in the COVID period as management implemented a minimum order value policy; it has been subsequently relaxed in FY22 driving lower AOV. It has continued to fall in Q1FY23

  • The contribution margin per order was around INR 315 in FY21 which has come down to INR 276 in FY22 with higher fulfillment expenses and marketing & advertising expense. We had seen an increase in fulfillment expense in Zomato too – so the story is consistent here. Contribution margin per order has increased to INR 325 in Q1FY23 vs INR 276 in FY22

2. Key Historical Financials

  • Revenue growth has been strong in FY22

  • EBITDA margin has fallen from 6.7% in FY21 to 4.3% in FY22 - higher Fashion segment revenue, fulfillment costs, and marketing expenses. EBITDA margin has expanded from 3.3% in Q1FY22 to 4% in Q1FY23 even after a higher contribution margin due to an increase in employee costs & other expenses

  • Cash Flow convertibility (CFO/EBITDA) was quite bad in FY22 as Company built the inventory level to insulate itself from supply chain problems and may be due to an increase in the offline presence

  • Return ratios (ROCE/ROE) have fallen in FY22 vs FY21

On an overall basis, mixed set of results in Q1FY23.

3. What is my view on company valuation?

The stock price of the Company has almost doubled from its IPO and now is up ~25%. The market, being flushed with domestic liquidity, has been looking for a good start-up growth story. And Nykaa is a profitable one – fits the bill perfectly.

Company trades at a Price to Revenue (annualized Q1FY23) ratio of 15x in comparison to:

  • International peers like Ulta trade at a multiple of Price to Revenue ratio of 2.5x

  • VCs have invested in the Company’s competitors like Purplle and Good Glamm Group at an equity valuation of around 8x revenue (expect this to fall in the next few months!!). We should keep in mind that VCs invest in a company with a lot of downside protection – with clauses like liquidation preference (if the company is sold then the money is distributed based on waterfall where the last investor gets 1-2x of the investment first before any previous investor receives any money). So, we should apply a discount to any VC investment valuation as the public investor does not get the same downside protection

Business is good and cash flow positive (a rarity for a start-up) but continues to be significantly overvalued at the current levels.

4. What are the risks to the investment analysis?

Risks to the analysis are:

  • Competitive intensity is expected to go up. Horizontal players like Amazon and Flipkart are increasing their focus on the segment. VCs have pumped a lot of capital into the competitors after seeing the IPO's success. Other players like Reliance and Tata Digital are also looking to enter the space

  • The lack of profitable alternatives in the start-up space can keep retail investors interested in the short/medium term


About the Author

I have over 17 years of experience in venture capital, private equity, and investment banking in India and the Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.

I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).

I am an Insignificant Investor in the public market and co-founder of SocInvest.


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.

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